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NEWS 24 June 2019

Analysis: Key points from the Eldorado-Caesars conference call

By Tim Poole

After Eldorado Resorts announced its $17.3bn acquisition of Caesars Entertainment, paying $12.75 per share, CEO Tom Reeg walked investors through the ins and outs of the deal.

Joining him for smaller contributions were CFO Bret Yunker and Caesars CEO Tony Rodio, before a Q & A with investors and market analysts took place.

The new firm expects the merger to close in the first half of 2020, subject to shareholder and regulatory approvals, until which point both operators will remain separate firms.

Below are highlights from the 70-minute conference call which covered a truly historic deal for the gaming sector.

Coming full circle

One of Reeg’s earliest statements on the call lavished praise on Rodio for the "phenomenal job" he conducted during Eldorado’s acquisition of Tropicana Entertainment in October.

Under billionaire Carl Icahn's ownership, Rodio was in charge of Tropicana until its takeover by Eldorado was complete. Lo and behold, Icahn became Caesars’ largest individual shareholder earlier this year, hiring Rodio as CEO to once again oversee a merger with, you guessed it, Eldorado.

Rodio will no longer serve as Caesars CEO, as Eldorado’s C-Level executives take charge of the new company – even though it will retain the iconic Caesars name. But Rodio’s short contribution makes up for its brevity through its significance.

Reeg is looking forward to more of the same as Rodio oversees the merged entity’s transition. That transition involves six Eldorado directors and five Caesars directors forming an 11-strong board, with Eldorado shareholders owning 51% of the new company and leaving Caesars' existing debt structure in place.

The CEO expects $1.5bn worth of free cash flow a year and envisages an eventual annual EBITDAR of $4-4.5bn. Currently, Eldorado’s estimates suggest a figure of $3.6bn, the largest in the market ahead of MGM Resorts International, on $2.5bn, and Penn National Gaming, on $1.2bn.

Organisational structure

The projected cash flow, equivalent to $10 per share, was emphasised as a "key takeaway" for listeners.

Something else focused on was a decentralised operating model. Part of that restructuring aims to achieve $500m in synergies within year one. Plans are in place for a reduction of Caesars’ corporate costs, currently amounting to the tune of $600m. Eldorado’s, according to Reeg, is closer to $40m, mainly due to smaller headcount.

The new Caesars will keep its executives in Reno due to ease of transport between the city and Las Vegas. Reno is "the home of this company and that’s where it’s going to remain," in Reeg’s own words.

On decentralising, he told investors: "We are firm believers we make our money at the local level and we need to empower those people to make decisions. That has helped us deliver results in past acquisitions. We believe that’s a reason Caesars has had the recent issues it’s had.”

Regional vs international focus

Eldorado’s past focus on regional strategy was made abundantly clear throughout the conference call. The new Caesars will look to increase regional revenue through its 60 combined properties, 51,000 rooms, 4,000,000 square feet, 4,000 tables, 71,000 slots and 300 food and beverage outlets.

Reeg’s responses on international ambitions however, were quite the reverse during the Q & A.

"We’ve not made a firm decision on international yet," he explained. "You know us as a company that’s domestically focused. The opportunity internationally is going to have to be stupendous for us to be running in that direction."

That approach was mirrored, too, in Reeg’s answers on future M & A prospects: "We know we’ve got a big job in front of us integrating the new companies. We would expect it to take a little longer than our typical acquisition in terms of size. There really are not a lot of places in the US where we don’t already have a significant presence.

"Never say never but there is not an obvious hole we need to fill. If we’re looking at future acquisition activity, the only piece missing is international markets. But I would expect that would be several years out."

Sports betting & William Hill

In sports betting, there is little need for further M & A due to the existing partnerships Eldorado and Caesars bring to the new organisation.

Recently, Gambling Insider spoke to William Hill about its US prospects and the UK-based operator was remaining patient to achieve the right deal. Through its previous partnership with Eldorado, a new opportunity has now presented itself: William Hill has access to a whole new database for sports betting with Caesars.

The same, too, applies for Stars Group. Both the sports wagering and online opportunities are ones Reeg has plenty to boast about.

"We bring William Hill and Stars Group access partnerships," he remarked. "Caesars has a plethora of sports partnerships including ESPN. We see them all fitting together. The opportunity in sports betting in the combined company is as good as there is out there at this point.

"I would say we will consider all alternatives in sports betting but we really like the setup we have with our partnerships. As an example, William Hill has been fantastic with us. We’re going to participate in the Fox Sports betting app through our deal with Stars Group."

Lessons for Las Vegas

Eldorado’s achievements in Atlantic City will shape the new Caesars’ approach in Las Vegas, it seems. The new company is expecting revenue to increase on the Eldorado side due to the combination of existing players with Caesars’ Total Rewards program.

Although a decision has not yet been made, Reeg also said the merged company will likely be "a seller of a Strip asset."

Even then, Caesars feels "very good" about its opportunity to compete on the Strip: "It’s a destination market, so the customer comes less often but stays longer. The opportunities there are about optimising who’s in your room when it’s going to be full.

"It matters who you put in that room. In this acquisition, that’s going to be critical as we bring our 10 million players into the Caesars database. We’ve got to make sure we’re doing the best job of yielding who’s in that room, what rate they pay and whether they are a gambler.

"It’s about optimising your efficiency when you are less than full, not forcing a full property when you are chasing business."

The discussions

In the end, Reeg cannot be said to have overstated the opportunity at the merged company’s door. While addressing its future outlook, he also referred to the lengthy discussions required to bring the new company into existence.

It was "as complicated a transaction" as the CEO has been involved in, in terms of documentation, although he refuted media reports of a disagreement on price: "All of the articles on price disagreements happened after a price was already agreed on 23 May."

When Carlo Santarelli of Deutsche Bank, an analyst regularly posting about Caesars of late, opened questioning by asking who else Caesars originally spoke to, Reeg was less dismissive.

He said: "We read the same things you read in the papers. We know Caesars were having other conversations. We were focused on what we could do with the assets. We are thrilled with the outcome."

RELATED TAGS: Mergers & Acquisitions | Feature
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